the annual report of the st. james’s place investment …/media/files/... · 2016. 1. 13. · in...

OF THE ST. JAMES’S PLACE INVESTMENT COMMITTEE

THE ANNUAL REPORT

2015

Chairman’s Statement

Chief Investment Officer’s Report

Stamford Associates’ Report The pathway to investment success

Redington’s Report The search for income in a low-interest rate environment

Interview with Steven Daniels, an independent member of the Investment Committee

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5

8

11

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Contents

Welcome to the Annual Report of the St. James’s Place Investment Committee 2015.

Last year I cautioned that, over the short term, markets are liable to surprise investors. Well, 2015 gave us plenty to think about, proving that success in the short-term prediction game remains as elusive as ever. Markets were buffeted by troubles in the eurozone, a summer crash on the Shanghai stock exchange, continued disappointment in emerging markets, falling prices for oil and commodities, weaker corporate earnings and a full-blown crisis at Volkswagen. Then, shortly before Christmas, the first Federal Reserve interest rate rise in nine years took place.

Such volatility can be deeply unnerving for investors, particularly those with an investment horizon of weeks or months rather than years. In reality, these are traders not investors. For investors with a medium- to long-term view, the daily ebb and flow of global markets should hold much less fear.

Whilst it can be difficult to remain calm and trust in your strategy in the midst of market storms, our advice is – and always has been – to ignore the inevitable noise that surrounds such bouts of short-term volatility. This is what successful investors are able to do. Indeed, we think these episodes should be viewed positively. Dan O’Keefe of Artisan Partners reinforced this point when we met on the west coast of the US earlier in the year as part of our ongoing monitoring process. In his words, “Volatility is a good thing, not a bad thing. It breeds opportunity.”

The Investment Committee remains committed to selecting and assessing the best managers available; managers whose judgment and perspective enables them to achieve the best outcomes for your investments over the medium term.

In his Chief Investment Officer’s Report, Chris Ralph provides a brief look back at the major market events during 2015 and the changes to the UK pension regime, including the introduction of pension freedoms. Chris also explains how our investment approach continues to evolve to meet the needs and objectives of our clients.

The Committee is able to draw upon the specialist knowledge and expertise of a number of external resources and counts both Stamford Associates and Redington amongst its closest and most trusted advisers.

Our relationship with Stamford Associates stretches back over 15 years and has overseen a significant part of the development of our investment approach. At the start of 2015, Alexandra Haggard was appointed as Stamford’s Chief Executive Officer; in this year’s report I’ve asked her to outline the key characteristics Stamford looks for in a fund manager.

Chairman’s Statement

THE ANNUAL REPORT OF THE ST. JAMES’S PLACE INVESTMENT COMMITTEE 2015 3

... our advice is to ignore the inevitable noise

that surrounds such bouts of short-term

volatilityww”

“

In his report, Rob Gardner, founder and Co-Chief Executive Officer of Redington, explains how the team executed the research and selection process for the investment managers appointed to manage the new Diversified Bond fund, which we launched in November 2015.

Other inputs to the investment process include Aon Hewitt, responsible for the monitoring of commercial property assets, and Asset Risk Consultants, advisers to the Committee on the construction and monitoring of our Growth and Income Portfolios.

The ability to call upon such a diverse range of specialist consultants provides the Committee with a much broader set of tools and, in turn, the opportunity to explore new or developing investment solutions.

At the heart of the Investment Committee are its independent members. Last year I announced the appointment of two new members, Davina Curling and Steven Daniels. The final article in this year’s report is an interview with Steven Daniels, who discusses his role and responsibilities on the Investment Committee and shares his reflections on his first year in office.

On many fronts, 2016 will be a busy year, with a lot for markets and investors to reflect on. In the UK, we have the EU referendum to contend with and, across the Atlantic, there are US presidential elections later in the year.

After a year of changes and surprises, it would be all the more unwise to make predictions about the outlook for 2016. Instead, we will hold fast to our investment philosophy: to seek and retain the very best managers who can identify opportunities across all asset classes, and who maintain a long-term perspective that keeps their eyes fixed on the horizon.

It only remains for me to thank you for your continued support and to reaffirm our commitment to fulfilling our duty of care in 2016 and beyond.

David LambChairmanDecember 2015

THE ANNUAL REPORT OF THE ST. JAMES’S PLACE INVESTMENT COMMITTEE 20154

w...we will hold fast to our

investment philosophy to seek and retain

the very best managersw”

“


... most major indices had a volatile

but ultimately unimpressive year.w” “

Looking back on 2015, it proved to be a year when, once again, macroeconomic and geopolitical events impacted the progress of global investment markets. In the US, the S&P 500 ended the year in positive territory but the standout performer was Japan, where the Nikkei rose more than 10%. Most other major indices had a volatile but ultimately unimpressive year. Closer to home, the FTSE 100 ended the year down, reflecting most tellingly the struggles faced by energy and mining companies, many of which are listed in London, as commodity prices continued their slide.

Those struggles were symptoms of the year’s strongest headwind. Demand from China for commodities has buoyed global growth since the financial crisis; but in 2015 that demand slowed considerably, as China’s own growth decelerated.

The deceleration points to the year’s broader themes: services, not manufacturing, are increasingly the drivers of global growth, and the developed world is performing much better relative to historic norms than developing markets.

Another divergence emerged by the end of the year in the form of central bank policy. The US Federal Reserve increased interest rates, albeit only marginally, for the first time in nine years in December, and the Bank of England may yet follow in 2016. However, the European Central Bank introduced new easing measures in the same month and the Bank of Japan seems likely to continue with its own version of quantitative easing as it expands its asset-buying programme.

In the US and UK, the central bank rate setters are encouraged by signs of growth, but it’s yet to pick up in the eurozone, and slowing growth in China has had a significant impact elsewhere.

Yet even in those developed economies with positive growth and employment trends, central banks remain concerned about persistently low inflation. A major factor was the declining oil price, which in December fell to its lowest since 2004.

Chief Investment Officer’s Report

Asset class Market returns in 2015 (%)

UK equities

European equities

US equities

Japanese equities

Asia–Pacific equities

Emerging market equities

Global equities

Gilts

UK corporate bonds

Total return-1.3

2.8

6.6

13.3

3.7-10.0

4.9

0.9

0.7

Capital return-4.9

0.2

5.0

13.3

1.3-12.2

2.9-2.2-3.5

Source: Financial Express; performance figures to 31 December 2015, expressed in sterling terms. Please be aware that past performance is not indicative of future performance.

Pleasingly, despite the impact of economic and geopolitical events on investment markets, the performance of our Growth and Income Portfolios has been in line with our expectations at the beginning of the year.

Outside of equity markets, other asset classes have achieved solid returns. Commercial property, whilst not reaching the returns achieved in 2014, continues to benefit from strengthening investor demand and a supportive economic backdrop. Absolute return strategies have also prospered as volatility returned to equity markets. Fixed-interest markets were relatively muted. The search for income meant that high-yield bonds led the way, although the Fed’s decision to raise interest rates did check progress towards the year end.

Looking ahead, the impact of slower growth in China will become increasingly apparent to investors, who should also anticipate the likelihood of further challenges in the eurozone; while a Brexit referendum and the US election both pose significant political risks to markets.

From a UK perspective, one of the biggest developments in recent years has been the radical overhaul of the pensions regime, and most recently the introduction of pension freedoms in April last year. Every individual over the age of 55 with a defined contribution pension now has the freedom to do with it what they wish. Retirees who previously found themselves confined to buying an annuity to provide an income no longer face such restrictions, and now have the flexibility to keep their fund invested whilst drawing an income as required.

Even those who previously purchased an annuity are to be given the option to sell it for a lump sum. A word of caution here: it’s not yet clear to us that this is a straightforward transaction and hence it may be difficult to value accurately.

For those planning for retirement, these changes mean that simply building up as large a retirement fund as possible, before the purchase of an annuity, is no longer the only approach to providing for the future. Many individuals will be invested for longer; and will also require more flexible investment solutions that are capable of providing capital growth and attractive, sustainable levels of income, whilst keeping control of their pension fund.

Against this backdrop, and cognisant of the prevailing low growth and low interest rate environment, it is no surprise that the need for income continues to be a focus for many of our investors. Our response was to launch the new Diversified Bond and Strategic Income funds, to address the growing need for alternative income-focused strategies.

Investors’ primary objectives are likely to remain, at their core, either to achieve capital growth or obtain income. Capital preservation and inflation protection are also important considerations for investors. In part, this has been highlighted by the introduction of pension freedoms, but it also reflects the recognition and growing acceptance that we are all living longer and need our investments to maintain their value for a greater period.


... more flexible investment solutions capable of providing capital growthww”

“


Clearly, headwinds persist and it is an inescapable fact that global investment markets will continue to fluctuate. With the support of their St. James’s Place Partner, investors need to review and adapt their investment portfolios to reflect the changes to the broader financial landscape. For our part, the Investment Committee needs to ensure that the resources and processes that underpin our investment approach continue to evolve.

What remains constant throughout is our unswerving commitment to the three tenets of our investment approach: select, monitor, change. As David reinforced in his Chairman’s Statement, no one can accurately and consistently predict the short-term direction of markets. With that in mind, 2016 is likely to be another eventful year for investment markets, presenting expected and unexpected challenges. Alongside these, it will also inevitably offer talented investors the opportunity to identify and profit from long-term investment opportunities.

We believe that by ensuring our investment approach retains the flexibility to adapt to new opportunities, and that it has the rigour to withstand the inevitable headwinds that occur from time to time, we will remain in a strong position to provide the investment solutions to help you achieve your financial goals.

Chris RalphChief Investment OfficerDecember 2015

... investors need to review and

adapt their investment portfolios to reflect the changes to the broader financial

landscape.ww”

“


In previous years’ reports, we’ve written about our global manager research process and our granular approach to fund manager monitoring. This year, we thought it would be helpful to look at the attributes we believe lead to investment managers being successful.

When considered collectively, these traits create what we call the ‘pathway to investment success’. We are looking for repeatable outcomes: outperforming both the benchmark and cash, over the long term.

First and foremost, we seek out skilled managers. This is different from luck, which can produce good performance, but not on a consistent basis. We pay little attention to past performance, because numbers will tell you (limited) information about the outcome, but nothing about why it happened. Instead, to understand whether a manager is skilful, we look at their investment and decision-making processes, and both good and bad decisions.

We need a deep understanding of an investment proposition and its analytical content to become confident in a manager’s skill. This requires transparency at many levels. Some say, “Trust me, look at my great track record. Why wouldn’t you want to invest in this?” But if we don’t truly understand what’s behind the story, and believe it can be successful in the future, we simply can’t recommend it.

We believe the decisions managers can make to create sustainable investment success are based on understanding business fundamentals combined with a well-defined valuation discipline. This involves assessing a business and its economics, understanding the competition and, often, triangulating information with suppliers and clients. Fundamental analysis also involves looking at the financial stability of a company. These assessments are more likely to be successful than macroeconomic forecasting or market timing, where there are innumerable unpredictable factors.

Skilled investors

Transparent investment

processFundamental

analysis

Conviction

Long-term horizons

Stamford Associates’ Report

The pathway to investment success


None of the above is relevant, though, unless a manager has conviction in their process and resulting investments. If managers have deep conviction in their decisions, they should be able to commit capital to a limited number of holdings, rather than composing a benchmark-type portfolio with few deviations. We want managers to focus on companies which they truly believe have superior fundamental characteristics and whose share price can be expected to outperform the market over the medium- to long-term.

And we want managers to only buy stocks that merit a space in the portfolio. We struggle to understand why managers would include “filler” positions that serve no purpose other than to reduce their portfolio’s risk relative to a benchmark. Unless you are different from the benchmark, how can you expect to beat it?

Finally, we look for managers who have a long-term investment horizon. Investing on a short-term basis is difficult to do successfully because of the market ‘noise’. Taking a longer-term view reduces the likelihood that unpredictable short-term factors will dilute or even destroy a sound investment decision. Many of the managers on the St. James’s Place platform have an investment time horizon of 3-5 years, and some will hold an investment for considerably longer.

Investment managers treading this pathway to investment success are difficult to find. However, they do exist and, if used appropriately, they can generate substantial rewards.

Being a truly active manager does mean short-term underperformance will inevitably occur sometimes. But it is easier to understand and withstand if the qualities above remain constant. At Stamford, we continuously review the managers, looking at their investment footprints, and meeting with them at least twice a year. In these meetings, we question their views, test our conviction in their investment proposition and seek to establish whether there has been any erosion of the attributes upon which they were appointed. Applying this process, Stamford has held 143 monitoring meetings with managers on the St. James’s Place platform during 2015.

As ever, we are steadfast in serving the Investment Committee and passionate about our role in helping to safeguard the integrity of the St. James’s Place investment management approach.

Alexandra HaggardStamford Associates December 2015

... to understand whether a manager is skilful, we look

at their investment and decision-making processes, and both

good and bad decisions.w”

“

... our review confirmed the need to reduce the level of interest rate risk without increasing

equity risk.”

“

In November 2015, the Diversified Bond and Strategic Income funds, were launched to St. James’s Place clients. This launch was the culmination of a project which we, at Redington, had been working on for almost a year.

For this year’s report, we have been asked to provide an overview of the process that underpinned our recommendation for the Diversified Bond fund.

The St. James’s Place Growth and Income Portfolios are continuously monitored to ensure they remain appropriate in the face of ever-changing market conditions. With concern over the possibility of rising interest rates, we were tasked with the objective of reducing the weighting in government bonds across the range of St. James’s Place Portfolios, as government bonds are more likely to perform poorly in an environment of increasing interest rates – particularly if rates rise more quickly than economists and commentators are expecting.

The Redington mantra is to “begin with the end in mind”. We began the process by reviewing the objectives and constraints of clients seeking returns from fixed-income assets and government bonds, and considering the outcomes that clients would expect. Next, we carried out detailed analysis to assess the sources of risk and return, as well as evaluating how the funds would perform in certain scenarios or ‘stress tests’. This multi-faceted approach, blending an understanding of the aims and objectives of the client with detailed statistical analysis, enabled us to form a judgement of not only the investment challenge, but also how we should approach designing the solution.

The outcome of our review confirmed the need to reduce the level of interest rate risk but without increasing equity risk.

The obvious solution to the latter of these is to increase exposure to fixed-income assets; however, this typically has the unfortunate consequence of increasing interest rate risk. What was needed was a new solution.

After considering a range of alternative options, we began the search for what are known as ‘absolute return fixed-income’ strategies. Whereas traditional fixed income mandates (i.e. corporate or government bonds) provide a diversifying source of return, they also carry additional interest rate risk. The specific approach adopted by different strategies will vary, but absolute return approaches typically employ a range of investment techniques with the aim of ensuring:

1. A relatively low interest rate risk, which can be adapted by the manager when opportunities are presented

2. A focus on capital preservation

3. The flexibility to move between different fixed-income asset classes to potentially generate higher returns

4. The construction of a highly diversified portfolio with exposure to a range of fixed-income markets


Redington’s Report

The search for income in a low-interest rate environment

w... blending an understanding of the aims and objectives of the client with detailed statistical

analysisw”

“


In setting out to build the structure of the Diversified Bond fund, we set clear objectives and constraints around return, risk and fees. We were also conscious that the structure needed to be scalable, and that each of the components of the fund had the capacity to provide a long-term investment solution. Furthermore, to ensure the most appropriate risk and return characteristics, it was important to achieve diversification across geography, investment style and differing managers.

Our fund manager research process screened the universe of potential solutions. Our analysis led to the identification of three ‘Redington-preferred Managers’. This process also determined the allocation to each of the strategies in order to achieve the desired risk, return and diversification characteristics for the fund.

We presented this solution in early summer. As you would expect, the Investment Committee process is both robust and challenging, ensuring a thorough examination of the research, rigour and justification for our recommendation. The managers of the underlying strategies were then subject to further due diligence by the Investment Committee and St. James’s Place before the new fund was formally approved.

The final stage of the process was to check whether the requirements and expectations of clients had been met. Our view – and that of the Committee – is that the Diversified Bond fund provides an exciting and complementary addition to the range of St. James’s Place investment funds.

Rob GardnerRedington December 2015

Brigade(US high-

yield bonds) 30%

Payden & Rygel

(global bonds) 40%

TwentyFour(European

high-yield bonds) 30%

Payden & Rygel• Fundamental, research-based, diversified

‘best ideas’ strategy which identifies investment opportunities from a global universe of government and corporate bonds

TwentyFour Asset Management• Rigorous research-based approach to

credit selection which identifies investment opportunities from a broad universe of European high-yield corporate bonds

Brigade Capital Management• Tactically invests across a diverse range of

fixed income assets from a universe of predominantly US high-yield bonds

Diversified Bond fund

What are your reflections on the first 12 months since you were appointed to the Investment Committee?

It is always interesting coming into a well-functioning committee which has been established for some time, and finding one’s place within it. I have been on a very rapid learning curve. I have found that the quality of the people within the Committee is excellent; they are very professional and focused on ensuring that St. James’s Place clients are well-served and their interests safeguarded.

How would you describe your responsibilities as an independent member of the Committee?

As an independent member, my role is to help and advise the executive members of the Committee on any investment-related matters, and to do so unfettered by any commercial considerations. For example, I might think that a newly recommended manager is an excellent proposition, but any negotiation with that individual concerning the appointment, including fees, is entirely a matter for the executive team at St. James’s Place.

What are the specific areas in which you feel you can add value to the process?

Each of the independent members share a common trait in that we’ve all had successful business careers and are able to bring a considerable amount of investment experience to the process. I have been managing the Tesco pension fund for four years and, prior to that, I was Group Chief Investment Officer at Liverpool Victoria. In those roles, I’ve had to consider all types of investments, from alternative assets such as private equity, hedge funds and real estate, through to more traditional areas such as equities and bonds. That has given me broad experience of not only different investment solutions but also individual styles and approaches to investing.

How can the range of skills and experience across the members of the Committee enable it to adapt as the financial landscape evolves?

St. James’s Place clients want to be confident that they have an investment solution that will work for them throughout financial cycles. One of the key changes since the global financial crisis is that interest rates have been much lower than historic levels and, although they are likely to rise in the next few years, I believe they are unlikely to get to previous highs for quite some time. That means managers have to work harder to create investment opportunities and to achieve returns that beat inflation. The task of the Committee is to find managers who can create value in that environment. The different backgrounds of the Investment Committee members complement each other well and mean we can be more confident in assessing the broader range of asset classes and investment solutions required in this new environment.

Interview with Steven Daniels, an independent member of the Investment Committee


... focused on ensuring that

St. James’s Place clients are well-served

and their interests safeguarded.w”

“

w... managers have to work harder to create investment opportunities and to achieve returns that

beat inflation.w”

“

Why are the external inputs, the investment consultants, so important to the overall investment process?

The investment consultants fulfil a vital function on behalf of the Committee. St. James’s Place has had a long relationship with Stamford Associates, led by Nathan Gelber and Alexandra Haggard, and the team there really understands how the business is positioned and the service it wants to provide its clients. The team at Redington, under the stewardship of Rob Gardner, was appointed more recently and has a different area of expertise and approach. However, importantly, both of them are very thorough in their due diligence on fund managers, at the selection stage and in the ongoing monitoring. They are also very good at seeking out ‘hidden gems’ from a global pool of fund managers.

Whilst there are some well-known managers available through the St. James’s Place fund range, there are many who are relatively unknown in the UK and some of which are available exclusively to St. James’s Place clients. I think that this is one of the key attributes and differentiators of the investment management approach.

Why should investors continue to have confidence in the St. James’s Place investment approach?

Fundamentally, the individuals who comprise the Committee are seasoned, experienced investors and the standard of the external advisers used within the process is very high. The Committee is also very conscious that the investment landscape is changing. In the past, perhaps it was acceptable simply to identify and appoint the best fund managers in the world for our clients. Going forward, St. James Place realises it is even more important that, in addition to having access to really good managers, our clients need to be provided with investment solutions that can adapt and evolve as the environment changes, and so keep them on track to help them to achieve their financial goals.

What are the main challenges for the Committee in 2016?

There is nothing we can do about the behaviour of markets, so our focus will be on providing St. James’s Place clients with a diverse range of flexible investment solutions that continue to meet their financial needs and objectives and, importantly, are able to adapt to changing market conditions. The Committee must ensure that, as the number of funds across the range continues to grow, we retain our focus on the outcomes we achieve for our clients and the quality of the investment managers we employ.


... identify and appoint the best fund managers in the world

for our clients ” “

The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.Members of the St. James’s Place Partnership in the UK represent St. James’s Place Wealth Management plc, which is authorised and regulated by the Financial Conduct Authority.

St. James’s Place Wealth Management plc Registered Office: St. James’s Place House, 1 Tetbury Road, Cirencester, Gloucestershire, GL7 1FP.Registered in England Number 4113955.

SJP975-VR13 (01/16)

FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence.

All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data

is permitted without FTSE’s express written consent.

Funds referred to in this publication may not be available to our clients in Asia. For information on the funds available, please speak to your St. James’s Place Partner.

The value of an investment may fall as well as rise and you may get back less than you invested.

the annual report of the st. james’s place investment …/media/files/... · 2016. 1. 13. · in...

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